Victor Talking Mach. Co. v. Kemeny

• Decision Date: 04 March 1921
• Docket Number: 2602.
• Citation: 271 F. 810
• Parties: VICTOR TALKING MACH. CO. v. KEMENY.
• Court: U.S. Court of Appeals — Third Circuit

271 F. 810

VICTOR TALKING MACH. CO. v. KEMENY.

No. 2602.

United States Court of Appeals, Third Circuit.

March 4, 1921

James M. Beck and Frank L. Crawford, both of New York City, John D Myers, of Camden, N.J., William H. Griffin, of New York City and Louis B. Le Duc, of Camden, N.J., for plaintiff in error.

Joseph E. Stricker, of Perth Amboy, N.J., and Frederick M. P Pearse, of Newark, N.J., for defendant in error.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

WOOLLEY Circuit Judge.

Louis Kemeny brought this action against Victor Talking Machine Company to recover damages, treble in amount, for injury done his business in violation of the Sherman Anti-Trust Law (Comp. St. Secs. 8820-8823, 8827-8833). Before determining what were the issues in the case and whether in their trial error was committed, we shall state the course of the defendant's business out of which the controversy arose and review very briefly some decisions which bear on its lawfulness.

Speaking of the parties as they stood in the court below, the defendant is a manufacturer of talking machines and accessories made and sold under many patents. It marketed its products primarily through wholesalers, who were called 'Distributors,' and secondarily, through 'Retail Dealers,' who secured the products from the distributors. The plaintiff had been a retail dealer.

With members of each of these classes of dealers the defendant had separate contracts called 'License Contracts' and in addition it affixed a notice, called a 'License Notice,' to each of its products. By the license contract with distributors the defendant disposed of its wares to them upon payment in full of list prices, with certain stipulated restrictions, among which was one that they should sell only to licensed dealers and then only at named prices.

The license contract with dealers provided for the purchase of the defendant's wares only from licensed distributors similarly restricting them with reference both to purchase prices and resale prices.

The license notice which the defendant affixed to a machine before it started to the public through the channels of so-called licensed distributors and licensed dealers declared that the machine was manufactured under patents and was licensed in the hands of the ultimate purchaser for the term of that patent having the longest time to run and was to be used only with accessories manufactured by the defendant; that the distributor's only right to use the machine was for demonstrating purposes, assignable to retail dealers and the public; that the right which the ultimate purchaser should have in the machine was only the right to use it; that the title thereto shall remain in the defendant with a right to repossess it upon breach of any of the conditions of the notice; and that 'any excess use, or violation of the conditions, will be an infringement of the said patents. ' Straus v. Victor Talking Machine Company, 243 U.S. 490, 494, 495, 37 Sup.Ct. 412, 413 (61 L.Ed. 866, L.R.A. 1917E, 1196, Ann. Cas. 1918A, 955).

The defendant had outstanding several hundred license contracts with distributors, many thousand with retail dealers, and innumerable license notices. It is not seriously denied that the defendant's purpose in formulating and putting into effect this method of doing business was the fixation of selling prices of Victor products from distributor to dealer and from dealer to the public under the defendant's conception of the monopoly created and awarded it under the patent law. But as later determined, the defendant's conception of its rights and its belief in the legality of its conduct were, all the while, wrong.

The main fact on which the law touching the validity of the defendant's conduct turned was the transaction by which the defendant initially disposed of its products to licensed distributors. However termed, these contracts were and subsequently have been held to be contracts of sale, and on payment of the contract price and delivery of the machine paid for, the distributor, and, later on, the retail dealer, became a purchaser and thereafter was entitled to dispose of it as his own. The question which ran through the cases involving similar transactions concerned the right of the seller to follow the patented commodity (sold through a primary purchaser and in some instances through a secondary purchaser) to the ultimate purchaser and to control its price at all times.

The first pronouncement by the Supreme Court bearing on the subject, of which we are informed, was made in 1873 in the case of Adams v. Burke, 17 Wall. 453, 21 L.Ed. 700. There it was said:

'The right to manufacture, the right to sell, and the right to use are each substantive rights, and may be granted or conferred separately by the patentee.

'But, in the essential nature of things, when the patentee, or the person having his rights, sells a machine or instrument whose sole value is in its use, he receives the consideration for its use and he parts with the right to restrict that use. The article, in the language of the court, passes without the limit of the monopoly. That is to say, the patentee or his assignee having in the act of sale received all the royalty or consideration which he claims for the use of his invention in that particular machine or instrument, it is open to the use of the purchaser without further restriction on account of the monopoly of the patentees.'

With one exception, the Supreme Court has consistently followed this rule of the patent law.

The next case in point of time and importance was Dr. Miles Medical Co. v. Park & Sons Co., 220 U.S. 373, 31 Sup.Ct. 376, 55 L.Ed. 502, decided in 1911. There the manufacturer of proprietary medicines, to prevent their sale at cut prices, undertook to govern directly the entire trade in the medicines of its make. To do this it adopted two forms of restrictive agreements limiting trade in the articles to those who became parties to one or the other. With marked resemblance to the defendant's contracts, one sort of contract was known as 'Consignment Contract-- Wholesale,' having been made with several hundred wholesale dealers; and the other described as 'Retail Agency Contract,' having been made with many thousand retail dealers. One issue turned on the character of the consignment contract, it being contended that it contemplated 'a true consignment for sale for account of the complainant. ' The trial court however regarded the contract merely as an effort 'to disguise the wholesale dealers in the mask of agency' and held that the purchaser acted in his own capacity, and that the transaction was one of sale. Being of the same opinion the Supreme Court held that the contract in effect eliminated all competition, established the amount which the consumer should pay and therefore constituted a restraint of trade, violative of the Sherman Anti-Trust Act.

Then came Henry v. Dick Company, 224 U.S. 1, 32 Sup.Ct. 364, 56 L.Ed. 645, Ann. Cas. 1913D, 880, sustaining the claimed right of a patentee to follow the patented machine into the hands of a purchaser and to restrict its use except in connection with prescribed unpatented articles. While confusion may have arisen from this decision and from the fact that subsequently it was overruled, its pertinency to this case bears mainly on the license notice attached to the machine, and on that part of the license contracts which permitted the use of the machines only in connection with other Victor products. The decision did not sanction the features of the defendant's contracts by which it sought to restrain competition and regulate the sale prices of its commodities as they passed from distributing purchaser to ultimate consumer.

The defendant in the instant case insists, however, that the main terms of the offending contracts were framed after the pronouncement and on authority of the law of Henry v. Dick. But it happened that before these contracts went into effect the case of Bauer & Cie. v. O'Donnell, 229 U.S. 1, 33, S.Ct. 616, 57 L.Ed. 1041, 50 L.R.R. (N.S.) 1185, Ann. Cas. 1915A, 150, was decided. In that case also the patentee sought to follow the patented article into the hands of the public, and, by 'Notice to Retailer' on each package, to impose a condition as to price, violation of which it regarded as infringement. The Supreme Court distinguished that case from Henry v. Dick, and, quoting from Adams v. Burke the rule to which we have adverted, held:

'A patentee may not by notice limit the price at which future retail sales of the patented article may be made, such article being in the hands of a retailer by purchase from a jobber who has paid to the agent of the patentee the full price asked for the article sold.'

The decision in Bauer v. O'Donnell was rendered in May, 1913. It was in August following (and more than a year after the decision in Henry v. Dick) that the defendant, with the law of Bauer v. O'Donnell before it, framed and put into effect the license agreements in dispute.

On April 9, 1917, the Supreme Court handed down a decision in Straus v. Victor Talking Machine Co., 243 U.S. 490, 37 Sup.Ct. 412, 61 L.Ed. 866, L.R.A. 1917E, 1196, Ann. Cas. 1918A, 955, reversing Victor Talking Machine Co. v. Strauss, 230 F. 449, 144 C.C.A. 591.

This action was brought by Victor Talking Machine Company, the present defendant, against Straus and others for infringement of its patents in acquiring Victor products from sources other than licensed dealers and disposing of them to the public contrary to the conditions of the attached license notices. In the prosecution of this suit, the Victor Company set forth in its bill of complaint its entire scheme of operation. The plaintiff in the case at bar availed himself...